National spot gold exchanges face fiscal hurdles and until the issues are resolved, they are unlikely to begin operations.
The three national exchanges had initiated the process to start spot gold trading, either as a segment on the existing exchange or as a separate platform.
The National Stock Exchange (NSE), the country’s largest exchange for cash stocks and derivatives, has announced a merger with the Indian Bullion and Jewelers Association (IBJA). IBJA members will take shares in the proposed business and the whole process for that is supposed to be in the last stage.
BSE, India’s oldest stock exchange and leader in mutual fund (MF) investing, has decided to launch a spot gold segment on its existing platform. The Securities and Exchange Board of India (Sebi) has notified all standards and regulations for spot gold exchanges. But there is the crucial question of Goods and Services Tax (GST), and this must be resolved before trading begins.
The process is that whoever wants to sell gold on the spot exchange will first need to deposit the gold in an exchange-approved vault for conversion into Electronic Gold Receipts (EGR). Whether the trader deposits imported refined gold or domestically refined gold, he would already have paid 3% GST on that gold. GST is paid on imports of refined gold as well as unrefined gold (dore).
EGR are traded on national stock exchanges without GST as they are a security instrument. This EGR can change several hands before someone chooses to rematerialize it by taking physical delivery of the gold. However, the original depositor of gold will not receive a GST refund until the EGR is rematerialized for physical gold. This locks in the initial depositor’s liquidity and 3 percent is a lot of money for a commodity like gold.
“BSE has received approval in principle from Sebi to launch it (the spot gold trade) as a segment and is awaiting further clarity on tax issues before official launch, although the fictitious trade has started,” said Sameer Patil, Commercial Director. , BSE.
The IBJA, the jewelry industry’s leading body and partner of the NSE’s gold exchange, has suggested the government create a notional entity where all GST is immediately refunded by the government to the trader as soon as the gold is deposited in the safe. This fictitious entity may also collect GST when EGR rematerialization is performed in physical gold. This system already exists in China.
Granting GST refunds to a bullion dealer who deposits gold in the vault is akin to the already widespread system of granting refunds to a reputable exporter. This system does not cause any loss of revenue for the government, but will also ensure the success of the gold monetization program (GMS). Needless to say, there are 25,000 tons of gold in India and it can be brought to the national exchanges offered.
Another problem is that of importing gold through the FTA with preferential customs duties. These can also distort the market and prove to be a hindrance to price discovery on exchanges. Gold imported at preferential rates generally trades at a discount in physical markets and, therefore, will be cheaper than exchange-traded gold.
Surendra Mehta, National Secretary, IBJA, said, “National spot exchanges will bring transparency to the gold ecosystem. It is essential that all gold bullion brought into the country is routed, bought and sold through national gold exchanges. This will also lead to price discovery.